Are Debtors Able to Keep Financed Vehicles Once They File for Bankruptcy Protection?

A frequent concern of debtors is whether they will be allowed to keep their financed vehicles once they file for bankruptcy protection. As explained below, the answer is yes, so long as they stay current on their vehicle payment and maintain the required insurance coverage on the vehicle.

When a debtor files for Chapter 7 bankruptcy, all contracts that previously existed between the debtor and his creditors are rendered “null and void”. If the debtor was financing a vehicle, the finance agreement (which is a contract) that existed between the debtor and the lender is no longer valid. If the debtor does not want to keep the vehicle, then the lender can no longer collect any balances owed on the vehicle from the debtor. The lender gets the vehicle back and the contractual balance owed on the vehicle is eliminated (discharged) in the bankruptcy.

If, however, the debtor wishes to keep the vehicle, then he or she must reinstate the finance agreement that was in existence prior to the bankruptcy being filed. This is done by both the debtor and the lender signing a document known as a reaffirmation agreement, which is provided by the lender. The reaffirmation agreement does not start the loan all over. Rather, it reinstates the agreement that was in existence prior to the bankruptcy being filed. For example, if the debtor had 30 monthly payments remaining on the vehicle when he filed the bankruptcy, then he would reaffirm the remaining 30 monthly payments, at the same interest rate and at the same monthly payment in existence prior to the bankruptcy being filed. The reaffirmation agreement reinstates the loan and continues it as if a bankruptcy had never been filed.

Vehicle lenders will always offer a reaffirmation agreement in a bankruptcy, because they stand to make a bigger profit if the debtor retains the vehicle than if the debtor surrenders the vehicle. A financed vehicle tends to depreciate at a much faster rate than the balance on the underlying loan is being paid off. At any given point in time, unless there was a substantial down payment on the vehicle at the time of purchase, the debtor will owe significantly more on the vehicle than what the vehicle is worth - debtors start losing money on a vehicle the minute they drive it off the dealer’s lot.

If the debtor surrenders the vehicle, then the lender gets the vehicle back and by law has to auction it off. Once auctioned, the lender must give the debtor credit for the sale price realized. In the extremely unlikely event that there is a surplus - the vehicle auctioning for more than what was owed - that surplus will go to the debtor. More likely, what usually happens is that due to depreciation, the vehicle will auction off for much less than what was owed on it, and the lender has to eat the resulting deficiency. The lender cannot collect this deficiency from the debtor as the balance would be eliminated (discharged) in the bankruptcy.

However, if the debtor keeps (reaffirms) the vehicle, the lender will not lose anything. By reaffirming, the debtor is agreeing to pay the balance owed to the lender, in full. The lender will not suffer any loss whatsoever. This is the reason why lenders are so eager to provide reaffirmation agreements reinstating the obligation - they make a profit if the debtor keeps the vehicle, but suffer a loss if the debtor surrenders the vehicle.

The only criteria required by lenders in offering reaffirmation agreements is that the debtor is current on the vehicle payment and that the debtor has the contractually required insurance coverage, (usually “full coverage”) in force.

A huge protection afforded debtors once they reaffirm a vehicle is that they have 60 days from when the reaffirmation agreement is filed with the Court to change their minds and back out of the deal. This is known as a “recission”. If the debtor does change his mind within the 60 day period and backs out of the deal, he has no liability to the lender. Otherwise, once the 60 days are up, the debtor is locked in and becomes liable all over again on the loan as if a bankruptcy had never been filed in the first place.

Please feel free to call the Law Offices Of Joseph L. Grima & Associates P.C. at (313) 385-4076 so that we can explain how you can keep your financed vehicle if you file for bankruptcy.